Monthly Archives: September 2014

On September 16th the Consumer Financial Protection Bureau announced that it is suing Corinthian Colleges over illegal predatory lending and debt collection practices. The CFPB’s lawsuit provides clear evidence that Corinthian used bogus job placement claims to induce students to enroll and take out costly private loans – loans the company knew most students would be unable to repay. The lawsuit demands an end to these practices, and forgiveness of more than 130,000 private loans made to students since July 2011, including more than $500 million in outstanding debt.

Given the overwhelming evidence that students enrolled and took on debts based on the corporation’s false and misleading claims, AFR members, including TICAS and NCLC, have welcomed the lawsuit. We have also wondered why federal loans to these students should not also be forgiven – something that would require action by the Department of Education.

With more than 100 campuses across the country, Corinthian is one of the largest for-profit, post-secondary education companies in the U.S. The CFPB’s investigation found that the school was making false and deceptive representations about career opportunities which led students to enroll and take out private loans with high interest rates. After loans were originated, the school was using illegal tactics to collect on those loans while students were still in school.

The Bureau’s complaint against Corinthian details a number of remarkably abusive practices, including:

Corinthian’s business model has been to target vulnerable potential student prospects, and mislead them both about the school and about the loans. A 2011 survey of campus operations showed that over 57% of students had household incomes of $19,000 or less, while 35% had household incomes of $10,000 or less.

Under federal law, for-profit colleges cannot receive more than 90% of their revenue from U.S. Department of Education aid. In order to meet this requirement and continue to operate off of DOE revenue, the school deliberately inflated tuition prices to exceed federal loan and grant limits, which created a “funding gap” so that students had to take out private loans. Corinthian then steered students toward private loans to fill gap that the school essentially created. These private loans, known as Genesis loans, added significantly to students’ debt burdens.

In marketing these private loans, Corinthian did not tell students that the college had a financial interest in them, when in fact it did. Corinthian then took aggressive action to collect on the loans, including pulling students out of class to publicly shame them for not paying back loans.

The loans had extremely high interest rates. In 2011 interest rates for Genesis loans were 14.9% with an origination fee of 6%, while interest rates for federal student loans were 3.4% to 6.8%, with a 1% origination fee. Corinthian continued to make these high-cost loans even though it knew that most students would have no way to repay them. To date, more than 60% of students with Genesis loans have defaulted on them within three years.

Corinthian lied about its job placement rate, in order to maintain accreditation and eligibility for Title IV aid, and induce students to enroll and take out its private loans. The college cited these falsely reported their job placement rates in marketing materials and in documents submitted to accreditors. At a Decatur, GA campus, school employees created fake employers and reported students as having been placed with them, increasing placements rates substantially. Corinthian also paid employers to temporarily hire graduates, with one campus organizing a company to employ graduates for two days at a health fair, and then counting those students as “placed” in order to increase placement rates.

Corinthian misrepresented how well students would do after graduating from its program to entice students into enrolling and incurring debt. The college trained its admissions representatives to pressure students who were also parents by telling them that enrolling in a program was their best or only chance to help their children. It also trained admissions representatives to falsely tell prospective students that classroom seats might not be available in the future, pressuring students to sign up immediately for classes and take on Genesis loans.

The Dodd-Frank Act of 2010 gave the new Consumer Financial Protection Bureau (CFPB) a special mandate to go after fraudsters who prey on members of the military, taking advantage of many servicemembers’ financial inexperience and frequent relocations, among other points of vulnerability. The agency created an Office of Servicemember Affairs to focus on this piece of work.

In just three years since the agency has been up and running, the CFPB’s Office of Servicemember Affairs has racked up an impressive record of achievement:

In July 2014, as a result of a lawsuit filed by the CFPB and 13 state Attorneys General, service members won $92 million in refunds over the sale of computers, videogame consoles, televisions, and other expensive electronic products by a company, Rome Finance, which had concealed illegally high finance charges by artificially inflating the price of the goods.

In June 2013, the Consumer Bureau ordered U.S. Bank to refund $6.5 million to service members who had been cheated by a deceptive auto loan program. The bank had drawn active-duty soldiers to its Military Installment Loans and Educational Services program while purposefully hiding fees and payment schedules.

Just last month, the CFPB shut down an exploitative fee scam by USA Discounters, a retail chain located outside many military bases. The company was forced to return $350,000 to servicemembers who had been tricked into paying fees for legal protections they already had and for certain services that the company failed to provide.

The Consumer Financial Protection Bureau recently announced a plan to significantly expand the information that consumers can choose to make public when they file complaints. The bureau currently takes complaints involving credit cards, student loans, mortgages and checking accounts (among other financial products and services), posting a record of the company name and complaint category in each case. If the new plan goes forward, its public database will begin to include individual stories as well, minus identifying information.

The financial industry has let us know just how much it dislikes this proposal: enough to misrepresent it through and through.

The bureau has plainly said that it will continue forwarding every complaint to the appropriate company and giving the company 15 days to respond before a complaint is published. In addition, the bureau is now proposing to give both parties a chance to tell their stories, with the company’s account posted directly alongside the consumer’s.

You would never know this, however, from the massive media campaign launched on Monday by the Financial Services Roundtable, the trade association of the nation’s biggest banks, insurance, asset management, finance and credit card companies. In a blitz of public statements, blog posts, social media messages and attack ads on the walls of the Washington Metro system, the Roundtable paints a menacing picture of “bureaucrats” posting baseless complaints and giving companies “little opportunity to respond,” so that, as Roundtable CEO Tim Pawlenty wrongly put it, people see “only one side of the story.” The Roundtable has created an entire mini-website based on this falsehood.

What’s going on here? Were Pawlenty & Co. in such a rush to denounce the proposal that they forgot to read it? More likely, they’re playing fast and loose with the truth because they would rather not come right out and say that what they really object to is the whole idea of a public database where people can learn about specific consumer grievances and how they’ve been addressed by the companies the Roundtable represents.

The Consumer Bureau (the target of this and many previous industry attacks) is the agency originally proposed by Elizabeth Warren in 2007, and formally established by the Dodd-Frank financial reform law of 2010. Its mission is to bring basic standards of safety and transparency to a market that had become notorious for its abusive practices – practices that imposed huge hidden costs on consumers, besides contributing to the financial crisis of 2008 and the economic meltdown that followed.

The complaint system provides the bureau with valuable real-world insights to apply in its rule-making, supervision and enforcement. By making some of the data public, the bureau hopes to empower consumers and, at the same time, to inspire companies to seriously investigate and respond to complaints, since it would be impractical for the bureau to investigate them all. (There were 113,000 filed last year.)

That system is already making a difference. The bureau’s Office of Consumer Response has received more than 400,000 complaints since it got up and running in 2012. More than 30,000 consumers have gotten monetary relief. Tens of thousands more cases have been resolved by other forms of remedial action.

But the complaint database has the potential to be far more effective if, as consumer groups have long urged, it includes a record of the specific problems that consumers have encountered, and the specific ways in which companies have dealt with those problems. This additional information will make it easier for consumers to spread the word about unfair practices, to compare competing companies and products, and to avoid dangers and pitfalls. It will help spur a virtuous cycle in which more people decide to use the system, and their contributions make it more useful still.

Financial companies also stand to benefit from the ability to compare their experiences with those of competitors, spot opportunities for improvement, and correct problems before they get out of control, the way bad mortgage lending did in the runup to the financial crisis.

For now, though, the industry seems to be stuck on a course of no-holds-barred opposition, and willing to traffic in multiple untruths in service of the cause. The Roundtable would have us believe, for example, that the “vast majority” of complaints filed with the bureau are totally unfounded and thus unworthy of publication. Its evidence? The fact that 70 percent of last year’s complaints “were closed with a simple explanation or clarification.”

Several large factual problems lurk inside this assertion. First of all, a “simple explanation or clarification” can be just what a consumer wants and needs; take the case of someone struggling with a mortgage and trying to find out what can be done to avoid foreclosure.

The use of the word “closed” is misleading in its own right. As the Consumer Bureau admits, its ability to follow up on individual complaints is limited. Cases can be closed without any investigation or adjudication by the agency; and they can be closed with a simple explanation or clarification essentially because that’s what the company saw fit to do. By no means does “closed” equate with resolved, as the industry implies.

Legitimate issues are often raised in complaints even if they involve no clear violation of law. The bureau has already drawn on the complaint database to identify worrisome patterns of conduct in credit card, debt collection, mortgage servicing and other areas, sometimes leading to proposals for new rules or procedures to make the financial marketplace safer.

In its ads, the Roundtable suggests that there is something extraordinary or unprecedented about having a government agency publish consumer complaints. That, too, is inaccurate; the Consumer Bureau is proposing a system that resembles, among other existing databases, one on product safety maintained by the Consumer Product Safety Commission.

The financial industry will probably not stir a great wave of public sympathy with its attacks on this proposal. Then again, public sympathy is not what it’s after. The sympathy it seeks is from lawmakers and regulators, and we can be sure it has other techniques – both cruder and more artful – for reaching them. We’re talking about an industry that (as documented in a new report from Americans for Financial Reform) spends about $1.5 million a day on campaign contributions and lobbying, leaving aside the cost of such ancillary activities as the Roundtable’s ad campaign.

So we can depend on the financial lobby to go all-out in its effort to derail the Consumer Bureau’s plan. That means that others must work equally hard to keep this worthy proposal on track.

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This blog is maintained by AFR as a forum for ongoing news and commentary about the fight for effective financial reform. Blog posts represent the opinions of their authors / posters, and do not necessarily represent the views of the AFR coalition or coalition members.